Visitors pass a Huawei marquee in Barcelona during the Mobile World Congress last year. The daughter of the Chinese telecommunications giant's founder was arrested Saturday in Canada on U.S. request, in a move that threatens to inflame U.S.-China trade tensions.

Dec 06, 2018

by:

Rob Schmitz, Colin Dwyer

Just days after President Trump announced a "BIG leap forward" in relations between the U.S. and China, tensions between the two economic heavyweights are escalating once more. This time, the focus of the friction is on Meng Wanzhou, scion of a Chinese telecommunications giant.

On Saturday, Canadian authorities arrested Meng, the daughter of the founder of Huawei. Meng is the company's chief financial officer. A Canadian Justice Department spokesman acknowledged Wednesday that law enforcement took her into custody at the request of the U.S., which is seeking her extradition for allegedly violating its sanctions on Iran.

The arrest came the same day as Trump's self-described "extraordinary" meeting with Chinese President Xi Jinping in Argentina, on the sidelines of the Group of 20 summit. But it would not be until days later, on Wednesday night, that news of the arrest surfaced publicly — and at that point, Beijing's reaction bore little resemblance to that meeting's hopeful tone.

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In a statement released Thursday, the Chinese Embassy in Canada protested the move as an act that "seriously harmed the human rights of the victim," referring to Meng.

"The Chinese side has lodged stern representations with the US and Canadian side," the embassy said, "and urged them to immediately correct the wrongdoing and restore the personal freedom of Ms. Meng Wanzhou."

The embassy vowed that Chinese officials would "take all measures to resolutely protect the legitimate rights and interests of Chinese citizens."

As the daughter of Huawei founder Ren Zhengfei, Meng is effectively business royalty in China. Huawei is the world's biggest maker of equipment for cellular towers and Internet networks, and the company is the world's second most popular smartphone brand.

James McGregor, the greater China chairman of the public relations firm APCO, likens the situation to what it would be like if Chinese law enforcement suddenly arrested a relative of Apple CEO Tim Cook or Microsoft founder Bill Gates.

"When that [news] turned up on my phone this morning, I was just breathless, actually — taken aback," McGregor says. "Oh my God, where is this going to lead? We're in uncharted territory."

Surprising as the move was, U.S. officials have made little secret of their dissatisfaction with Huawei.

For years, Washington has alleged the Chinese government could compel the company to tap into its hardware to spy or disrupt communications — a fear that's now elevated as the world prepares to upgrade to 5G, a new wireless technology that'll connect more items like self-driving cars and health monitors to the Internet.

As a result, some of the closest allies of the U.S., such as the U.K., Australia and New Zealand have banned or restricted Huawei on its 5G networks.

The U.S. launched a criminal probe into Huawei's dealings in Iran in April. Authorities have suspected the company has been involved in defying sanctions on Iran since 2016, when the U.S. investigated Huawei's Chinese rival ZTE over similar violations.

This year has also seen the eruption of trade tensions between the U.S. and China. The opening salvos of what Beijing has called "the largest trade war in economic history" were fired in July, when the U.S. implemented tariffs on $34 billion in goods from China. Since then, the countries have exchanged a tit for tat that has seen levies announced or imposed on more than $350 billion in imports between them — and Trump has threatened that still more may be on their way.

The meeting between Trump and Xi last weekend inspired hopes among some market-watchers that a resolution may be in the offing. The two leaders agreed to postpone new tariffs for three months, with the intention of giving themselves time to reach a permanent deal.

But those initial hopes faded by Tuesday, when markets across the world slid with rising skepticism over how firm the deal actually was. And Meng's arrest sent stocks still further into a spiral Thursday as Asian markets reacted to the news.

As for Huawei, in particular, a spokesman says the company is not aware of any wrongdoing by Meng, whose bail hearing has been scheduled for Friday.

Some in the China business community think this arrest shows that the Trump administration has stopped treating China as a special case and will now deal with Chinese companies as it deals with U.S. companies that break the law.

"This is usually the kind of move China does," says McGregor. "When China's got some tough political problem going, often it ends up arresting someone, some foreigner, some Chinese with another passport, and kind of holding them hostage."

"They're not going to look at the legality of it," he added. "They're going to look at it as completely political."

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